FHA mortgages are insured by the Federal Housing Authority (FHA). The FHA does not loan money to home buyers, but stands behind lenders who offer these loans, protecting the lender from losses if the borrower defaults on the loan. FHA mortgages are relatively easy to qualify for, making FHA loans particularly attractive for first-time home buyers, buyers with modest down payments, and people with less-than-perfect credit. But anyone purchasing a property which qualifies for FHA financing can benefit from this popular program.
FHA mortgages require a down payment as low as 3.5%, and these loans are generally available to buyers with minimum credit score of 580. However, individuals with credit scores as low as 500 can qualify with a larger down payment of 10%. The maximum allowable debt-to-income ratio is also higher than other types of mortgages.
The relatively high debt-to-income ratio makes it easier to qualify for a FHA loan than other types of mortgages, and permits buyers to borrow more than they could with other mortgages. This fact, coupled with the low down-payment requirement, puts a wider selection of homes within reach of prospective Los Angeles home buyers. A prior bankruptcy or foreclosure does not necessarily disqualify buyers, making FHA mortgages available to millions of Americans who suffered credit damage due to the 2007-2008 financial crisis.
FHA loans have strict eligibility requirements for properties to be financed; not all houses and condominiums for sale will qualify for a FHA mortgage. The generous debt-to-income ratio and low down payment can lead some buyers to purchase more home than they can comfortably afford, leaving them vulnerable to unexpected financial setbacks. Plus, with a low down payment it takes longer to build equity, which can make selling a home within the first several years of ownership a difficult proposition.